© 2019 Full Time Day Trader. All rights Reserved.
If someone sells you food and you buy it, the money the seller earned from the sale is what we call revenue. Whether it is the sale of services, food or other commodities to individuals or organizations, these revenues are recorded as sales in the income statement.
Before deduction expenses and other costs, the utilization of capital or assets connected to the main operations of an organization is also considered revenue.
For the benefit of proper accounting measures, profit and loss statement indicates revenue or sales at the upper part. This is also where all expenses, costs are subtracted – resulting in the net income. This metric is very important especially for investors who want to learn more about the status of an organization or a business.
Operating Revenue is the type of income that comes from the company’s core business processes and activities. An example can be selling some products or providing key services. It is the blood that keeps the company running. The higher operating revenue is, the better for the business. It implies that the company is thriving and stable.
On the other hand, non-operating income is the revenue earned by the company from its secondary business activities. One great example of this is when selling a subsidiary. This is not a prime mover of the organization. This kind of activity is only executed once. For example, if the business activity involves technology and there are different sections under it, such as artificial intelligence, Internet of Things, consultancy and mobile app development.
For example, the company decides to sell the consultancy division – this only happens once. The company will push through with its main activities generating operating revenue – in this case, providing technology connected to products and services.
Here are some non-operating revenue categories:
Rental Revenues. If the company leases or rents some of its equipment or technology to other companies or organizations.
Dividend Revenue. Income generated from shares which belong to other companies and owned by another company. For example, Tech Company A is interested in cryptocurrency manufacturing but it costs them more to set up a plant. They would rather buy shares in a start-up.
Interest earned. Deposits to bank accounts earning interest or earnings from investments ventured by the company.
Companies own and maintain several revenue accounts, separated to monitor and assess various streams of income. Moreover, various revenue sources have different ranges of taxes.
Also, companies have contra-revenue accounts for cases where items will negatively affect revenue. When the customer returns goods or estimate bad debt or when discounts are offered to clients, contra-revenue accounts are created for these items.
The contra revenue amount is deducted from revenue earned by the company when calculating contra revenue accounts. This amount is subtracted before net profit is calculated and tax dues are estimated.
Accrual accounting identifies the company’s health status and performance by acknowledging how it fares in the economy. In this approach, current and future cash inflow/outflow are combined to provide a precise trend and idea of the business’ financial capability and status.
This method became famous when investors, management, and shareholders needed to identify the status of their finances including events such as items selling on credit which provides revenue for the company.
Cash accounting, on the other hand, uses the documentation of payment receipts received for a specific time period, as well as the settled expenses for the same period. In hindsight, it is the recording of expenses and revenues when cash was paid and received. It is also known as cash-basis accounting.
Accrual vs Cash accounting
In this case, Company A ordered desktop computers from Company B on January 10th, 2019.
Payment for the computers was settled by Company A on January 17th, 2019.
Company B accountant will document the revenue received on January 17th and not on January 10th.
WHY? This is because Company A did not provide payment until all the computers were delivered.
This is cash accounting.
For accrual accounting, Company B accountant will document the transaction on January 10th even if the payment was not made yet.
Revenue is a key metric helping us present the true status, position and business performance. This is essential to shareholders, investors and the management of an organization. It is also used in providing cash for the operations without putting the assets on credit. Moreover, it helps us determine if we are overvaluing the net worth of our company.